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tv   Bloomberg Pursuits  Bloomberg  June 17, 2018 1:30am-2:00am EDT

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♪ >> president putin and mohammad bin salman meet before the next opec meeting. the trump effect. trade skirmishes rattle every market, and the president adds volatility to the commodity world. and it's getting hot in here. the drought rattles though market in the u.s. ♪ alix: i'm alix steel. this is "commodities edge." 30 minutes focused on the companies, physical aspects, and
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the trading behind commodities. we kick it off with spot on. joining me now is francisco blanche at bank of america merrill lynch, good to see you. spotlight, russian president vladimir putin and mohammad bin salman meet on the sidelines of the world cup, russia had no problem on the field with a big blowout and on the oil front it was the saudi's that made the headlines. they say and output increase is inevitable. "i think it will be a reasonable and moderate agreement but nothing outlandish. what does that mean? >> we will find out the details next weekend in vienna. the action is clearly happening in moscow and it probably kicked off a couple weeks ago.
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discussions have been going on for some time and it is pretty clear that the cartel will increase production. we inspected increase from here to the end of 2019. it is a gradual increase. basically priced to bring the market into a better balance. right now, we are growing inventories probably at two faster rate. alix: the saudi's said 1.5, and this is what putin said, he said we are not interested in and in this rise in the price of energy and oil, we are satisfied with $60 per barrel, above that can lead to albums for consumers which is not good for producers. does 1.5 or 1.2 get him to $60? >> probably not. our baseline next year is $75 per barrel on brent. even 1.2 billion barrels added to the market, we will not have a surplus. you would have to ramp up from four players, russia, saudi, emirates and kuwait, to roughly 2 billion -- 2 million barrels a day.
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if you increase 1.2, you'll probably stay around $75. we are losing venezuelan output and a fair amount of iranian output as u.s. sanctions kick in in november. these are key factors. alix: the other question, when we look at opec's spare capacity, a continues to grind lower. what do they do about the criticism, the more they pump, the more they take away from future production? >> that is a key point. when i was here last time, i think we spoke about the long dated prices, we talked about that in april. since then, we've had an increase in the long-term price of oil. i'm sure opec is looking at the carefully and thinking how to deal with the issue.
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next week, we could see a major capx announcement plan. the oil curve will be anchored around sanctions. alix: they enter the back of the curve at one price, and at the front end, it will do the vacillating. >> that is a great way to put it. i think they are going to look at structure and volatility and other metrics, and inventory, to get a complete picture of the market. opec has been focused on getting back to a five-year average, but in our view, looking at the curve is a better metric. were looking at -- they're looking in absolute price levels but we think they should look at structure, it is a cleaner way to look at whether the market is balanced. alix: how contentious will this be?
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you look at fiscal breaks across opec, they range in different directions, and saudi arabia is in the $87 range according to the imf. how do you deal with that if you are saudi or kuwait? >> they've been bracing a long time. you have the two main parties in agreement, russia and saudi, fracture at the heart of the agreement. one is running on a floating exchange rate and one is not. saudi would like to see more dollars coming through, and russia would like more barrels into the market. there is that inner intention in the deal. i think it has managed well, but now iran sanctions and venezuelan output is affecting the. if venezuela was coming back, it would be more competition situation for russia and saudi to work together. i think they're going to try to keep things not too high, below
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$80 per barrel, demand gets dented. eventually we get to $80 or $90 next year, i think saudi will be happy, but you can't go from an average of $54 last year to $88 per barrel this year, that would dent the world economy. alix: when you look at how quickly this will come online and you look at russia and saudi and oil production, russia wants to reportedly get the production backup to 2016 levels in a month. what is your base case for the increase? >> we think it will be gradual. roughly 200,000 barrels per day every quarter of incremental capacity. maybe some more initially, and then depending on how u.s. shale is doing. u.s. shale supply is constrained because the bottleneck in the permian. despite that, it is growing quickly, at the fastest rate ever in terms of barrels.
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remember, eventually all of these barrels a make it to the market and we won't need as much opec oil into 20nd020. alix: time for your takeaway, gradual 1.2 million barrels may increase over the next several quarters, the big one, maybe announcing a cap x planted -- capex plan. coming up, cheese. copper got hit along with industrial metals on weaker chinese economic data. ♪
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♪ +alix: i'm alix steel, this is "commodities edge." time to delve deep into the market trends. first up, oil inventory numbers, a big drop in crude stocks, 4.1 million barrels. imports down, exports up, and u.s. gasoline demand at a record. in the crop market, it is getting hot in here. big problems for wheat in the u.s. it could be down more than 5%. the agency updated numbers this week, kansas down 19%. many questions as to whether the number is too conservative. corn also had a wild ride this week. here's the bearish case. u.s. crop conditions have been perfect after planting, but the bullish case, corn stockpiles. the usda says inventories will fall with record exports at the end of august and they could hit about 2.1 billion bushels, world
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demand is finally starting to outstrip production. sticking with food, let's look at these prices. under pressure from mexico, u.s. dairy producers count on mexico to buy nearly a quarter of the product. it was not just cheese, but also milk taking center stage at the g7. here's what president trump tweeted earlier this week, "canada charges the u.s. a 270% tariff on dairy products, did not tell you that." how do dairy tariffs work? >> in canada, they have supply management established in the 1970's. it is basically matching production with the demand. that is in order to maintain a very stable income for farmers. is very popular with farmers there and farmers here and other countries as well.
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alix: 270% is blended dairy powder, what is that? >> there is a plethora of dairy products out there, the president is essentially correct. beyond a small import quota, tariffs are increasing dramatically for this category of different products. that is something, it is an eye-popping number. alix: is canada being unreasonable? >> good question. the canadians would tell you now, they are understandably, as i told you, with the farmers. the canadian government is always quick to say we manage our production so we don't have a surplus. we are not dumping production onto the global market. but, it has been subject to complaints not just from the u.s. government, but from new zealand and i believe mexico as well and the eu.
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they have complained about the lack of access to the canadian market and unfair competition. alix: thank you very much. let's get into the charts you want to watch this week. commodity prices, take a look at what is happening to aluminum. the blue line is aluminum prices in the lme. the white line is prices in the u.s.. francisco still with me. describe the effect on trade, the aluminum prices here and in london. francisco: whenever you place a tariff on imported aluminum, you raise the u.s. price and depressed the international price. that is reflected on charts. it has been going on quite a bit, we have seen it in things like dairy products but also steel and pork.
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there is a whole debate around it. there is a lack of clear policy with this administration, it is suiting from the head -- shootingthd seei what happens. we have extensions for u.s. allies, then we have sanctions on the world's largest aluminum abuser, about 6% world supply. they were exempted, but dairy has been kept in the pocket. people are moving around. this is a major issue for the commodity markets but also a major issue for monday consumers. alix: let's talk about cotton, it has also been affected by tariffs. franciso: mexico is trying to retaliate the aluminum and steel tariffs by hitting america where
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it hurts, and that is basically on commodities they import from u.s. that come mostly from red states. that is the plan. what is interesting is how the tariffs affect the domestic market and how this could escalate into a outright trade war. could we end up in a trade war with these tariffs? yes, we could. we could see a major offsetting effect to the benefit of the text that on corporate's. i think they were saying earlier today, you have a big native effect from tariffs [indiscernible] how could that work? if you are a u.s. company producing [indiscernible] in america, now you are at the biggest advantage, because the tariff is on the rock commodity -- the raw commodity.
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you now want to move offshore. it keeps escalating. alix: all of that means more volatility in the commodity price. francisco, thank you very much. coming up, anthony marino tells us why he is betting big on canada. that is next on "commodities edge." ♪
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♪ alix: i'm alix steel, this is "commodities edge." is time to look at alternative energy. we are looking at cobalt, used in electric cars. companies are getting creative in how to finance it. cobalt has a deal, why is it significant? rt watson joins us from rio de janeiro. what was the data behind the deal? >> basically it is a streaming deal, two companies will pay to get the cobalt that will be extracted. it's almost a watershed moment, if you will, because the prices
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tripled for the metal in the last couple of years. it's an opportunity to expand, go underground. they might not do that if it wasn't for the electric car revolution. this is provided an opportunity for them to get the financing they need. alix: when you're looking at how much they might get over the next decade, what cobalt prices that imply? >> it implies a price level of about $40 per pound, very similar to what it is trading out today -- trading at today. it's also a marker for what big companies like apple or carmakers like bmw might have to pay in the future to secure this from material. alix: it's not just cobalt, it is nickel and lithium. with nickel, there is another deal, they are billing and underground operation, and nickel mine in canada. what is the significance? >> they are the largest producer of mecca -- of nickel in the world, it has had a rebound and spurred by the electric car battery boom. it is a great move, it will keep the local government and those employed in a mind happy for
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years to come. alix: thank you, rt watson. let's turn to commodity and chief, where we fo a executive in the commodity world, today it is anthony marino. let's take a closer look at his company. ♪ alix: investors pulled over $100 million from canada's energy stock etf this year despite a rally. where investors see lost, vermilion energy sees opportunity. the canadian company doubled down in southeastern saskatchewan, buying barton energy and beefing up its presidents in and near the balkans. it looks to increase its capex. here are the prices, heavy oil prices in canada are trading
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lower than u.s. prices. canada cannot get the oil to the pacific and loses about $15 billion a year. it is hard to build infrastructure. canadian m&a for these companies did a paltry 19 deals this year. can these acquisitions turn the tide or is it one off value play in a struggling industry? i recently caught up with anthony marino to ask him about the acquisitions. anthony: we found on this m&a investment, we could make a high rate of concern -- high rate of return. using the commodities to evaluate, we found very high returns on the transaction of the level we were able to do it. alix: a lot of investors are companies have wanted to get out of canada and the conversation about it not being the best place to be. what gave you the confidence to go forward?
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anthony: i could address that a couple of ways. the first, looking at the profitability of canadian light oil in geral, we have gotten way lower differentials that in the permian, where lower royalties than the permian, and we have costs helped by the week canadian dollar. it is a u.s. nominated products, but with the week exchange rate versus usd, costs are scrunched down in comparison to what they would be in the u.s. because of the effect you are talking about, the exit from canadian investment that occurred in the past couple of years, the market has actually come to represent great value
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for transactions like this one. that's why we went light oil in southeast saskatchewan as compared to a heavy oil products. alix: but if you compare to the permian, they have a lot of oil but also a lot of companies getting in, which raises cost and they have tons of infrastructure and take away capacity issues. do you worry about the issues coming into your play? anthony: not so much. the permian, despite its great deal logic potential, has obvious problems. extremely high royalties, a big severance tax. rising service and infrastructure constraints. we don't have these and we don't really have any of these things present in southeast saskatchewan, in my view. i think we are extremely unlikely to get to that point. alix: would you make another acquisition, in canada or elsewhere? anthony: i don't think were going to make another significant canadian acquisition. there's always the opportunity to consolidate regions with small acquisitions, but i think we will renew our organic and m&a growth in europe particularly. we have a very balanced exposure. when you make a significant deal like we did with the spartan, canadian exposure comes up some,
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but it gives us better balance regionally and terms of free cash flow versus where we were at before. nonetheless, we have a strong european franchise, which we can build on. we have a geographic footprint to access a number of different markets and projects there, and we will be very focused on increasing the european part of our portfolio. alix: where? anthony: we should have an organic growth program in germany, we have begun drilling activity in central and eastern europe in hungary, we expect extended to slovakia and croatia and we will continue to have a moderate growth profile in the midlands -- and the netherlands. were also taking over operation of the large gas field off ireland, and we will have a modest step up in our ownership interest because of the.
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-- because of that. there's always the potential for acquisitions. we've had a good record in that historically. i can't predict when they would occur, but we are in a sufficient number of market in europe that i think we can continue to expand that franchise, consolidate the industry and continue this rapid growth we've had over the last couple of decades in europe. alix: that was anthony marino, for millions ceo. next week, sandridge's annual meeting. what winds up happening with activist investment? and we have the latest methane omissions report. they are one of the only environmental groups or companies listen to. and the event you have been waiting for, friday is opec's formal ministerial meeting. what will we know about more supply getting added to the
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market? that does it for bloomberg "commodities edge," catch us every thursday at 1:00. this is bloomberg. ♪
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scarlet: i'm scarlet fu. this is "bloomberg etf iq," where we focus on the assets, risks, and rewards offered by exchange-traded funds. calling all contrarians. do downtrodden dogs bark the loudest? one fund goes long on the worst-performing countries, but -- betting they may have the highest potential to revert to the mean. measuring liquidity here and how do you get nervous institutional investors at the idea of fixating on an etf trading volume to look at the liquidity in the underlying stock in the basket? so far this year, brent crude has sunk from the low 50's to as --

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